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..-. _ lit~ittvl St,at,tvi tit~tlr~ral AwcbrtfitJitlg OL l iw...-_._ l_ l ---.ll_- -._l _ _-_-~ _~_- GA! Apri 1!)!a --.._.._ _ MEDCARE Millions in Disabled Beneficiary Expenditures Shifted to Employers GAO United States General Accounting Office Wmhiugton, D.C Humau Resources Division B April lo,1991 The Honorable Lloyd Bentsen Chairman, Committee on Finance United States Senate The Honorable John D. Dingell Chairman, Committee on Energy and Commerce House of Representatives The Honorable Dan Rostenkowski Chairman, Committee on Ways and Means House of Representatives Section 9319 of the Omnibus Budget Reconciliation Act of 1986 (0~~~86, P,L ) made Medicare the secondary payer for medical expenses incurred by certain disabled beneficiaries covered by large group health plans (LGHPS).~ The essential component of this provision, however, applies only until October 1, To help the Congress evaluate the provision s effect, this section also directed that we determine (1) the number of disabled beneficiaries for whom Medicare became secondary payer because of their own or a family member s employment, (2) the resulting annual cost savings to Medicare, and (3) the provision s effect on employment and employment-based health coverage of disabled beneficiaries and their family members. n an earlier report to you, we responded to the first of these requirements,3 This second report addresses the issues of cost savings and effects on employment and health insurance coverage. Our field work was performed between April 1989 and March A principal source of our cost data was Medicare s intermediary claims data base. Because of the extensive time and resources required, we did not independently examine the internal and automatic data processing controls for this automated system. Except for this limitation, our work was performed in accordance with generally accepted government auditing standards. Under section 9319, a large group health plan is one covering employees of at least one employer with 100 or more employees on a typical business day during the previous calender year. 2The Omnibus Budget Reconciliation Act of 1990 (P.L , Sec. 4203(bT) extended the application of the essential component of the secondary payer provision affecting disabled beneficiaries to this date, Under OBRA-86, this provision applied only until Jan. 1, Medicare: Employer nsurance Primary Payer.for 11 Percent of Disabled Beneficiaries (GAO/ ay 10, 1990). Page 1 GAO/UD Medicare Shifts Some Meabled Costa to Employers Results in Brief n 1988, the OBRA-86 provision saved Medicare an estimated $322 million on the 214,000 disabled beneficiaries covered by an employer-sponsored LGHP through a working family member s participation. Medicare could have saved an additional $148 million had the program not mistakenly paid as primary payer for some health care services provided to these beneficiaries. Also, in 1989 Medicare saved an estimated $83 million more as the provision had its first full year s effect on 66,000 disabled Medicare beneficiaries who had their own health coverage under employer-sponsored LGHPs. About $39 million of these savings resulted from the provision s application to 26,000 beneficiaries with health coverage through their own employment (trial work programs or extended eligibility after trial work).4 The remaining $44 million in Medicare cost reductions resulted from the provision s application to a HCFA-estimated 29,000 beneficiaries, who although not working, are considered to have employee status and continue to be covered under a former employer s health care plan (see p. 6). To date, section 9319 of 0~~~436 has had little adverse effect on disabled beneficiaries or their family members in terms of employment or the cost and availability of employer-sponsored health insurance. However, responses to our questionnaires and to proposed regulations revealed that some companies were considering future actions that could adversely affect the relatively small group of disabled beneficiaries with employee status. Although proposed regulations would provide some protection against such actions, these regulations could be circumvented. n fact, HCFA expects that the number of individuals with employee status-and the Medicare savings associated with them-will consistently decline. n part, this is because employers will find ways to avoid the criteria for determining employee status. For example, some companies were considering eliminating right to return to work provisions for disabled individuals. n proposed regulations, HCFA has identified a broad category of individuals subject to the 0~13~436 provision because of active employee status, listing (1) three factors that each establish employee status and (2) five factors indicative of such status. Several companies have questioned the 4Under this program, disabled persons can attempt to reenter the work force by working up to 9 months-not necessarily consecutively-and continue to receive monthly Social Security benefits and Medicare coverage even though they earned substantial income (defined as at least $300 per month and beginning Jan. 1, 1990, $600 per month). A disabled person who continues to work beyond the Q-month trial work period can retain Medicare coverage for at least an additional 39 months. Page 2 GAO/itD Medicare Shifta Some Disabled Costs to Employers,/,,..:. B appropriateness of some of the five indicators. As we advised HCFA, at least one stretches our understanding of what constitutes employee status and, if included in the final rule, increases the likelihood of employers taking adverse employment or health coverage action. Potential savings from using the proposed factors indicative of employee status do not justify the risks of adverse action associated with these factors, Consequently, we recommend that HCFA delete the factors indicative of employee status from its final regulations. Once this recommendation is implemented, we recommend that the Congress remove the OBRA-86 provision s expiration date. Background Medicare is a federal health insurance program that covers most Americans aged 66 or older and some disabled persons under age 65. n 1988, the program included about 3.1 million disabled individuals under age 66. The Health Care Financing Administration (HCFA), within the Department of Health and Human Services (HHS), manages the Medicare program. HCFA contracts with insurance companies-called intermediaries under part A and carriers under part B-to pay Medicare claims and help ensure that Medicare claims are paid in accordance with the law. Since 1981, the Congress has enacted a series of amendments to the Social Security Act making Medicare the secondary payer when beneficiaries are covered by certain other health plans. Prior to these amendments, Medicare paid first (as primary payer) and the other plans paid at least part of what Medicare did not pay (as secondary payer). These changes do not directly affect beneficiary health care or benefits. Rather, their purpose is to reduce Medicare expenditures by shifting costs from Medicare to private insurers and self-insuring employers. Ultimately, these increased costs are passed on to plan beneficiaries, workers, or consumers in the form of reduced salary increases and/or premium or product price increases. The OBRA-86 secondary payer provision, effective January 1, 1987, applied to disabled beneficiaries who had &HP coverage through a working spouse or other family member. t also applied to disabled beneficiaries who had LGHP coverage through their own direct relationship with an employer-either through trial work or through employee status with a former employer. On March 8, 1990, HCFA proposed regulations listing three factors that each establish employee status, such as receipt of payments from an employer that are subject to taxes under Page 8 GAO/iRD Medicare Shifts Some Disabled Costa to Employers the Federal nsurance Contribution Act. HCFA also listed five factors indicative of employee status, such as having a legally enforceable right to return to work in the event disability ceases and participating in an employer s benefit plan in which only employees may participate. As of December 1990, HCFA was considering comments on the proposed regulations.6 Savings Realized Through Family Member s LGHP Coverage n our May 1990 report, we estimated that approximately 214,000 disabled beneficiaries (8 percent of the disabled Medicare population) had LGHP coverage through a working family member. To determine the Medicare savings from this group due to the OBRA-86 provision, we compared Medicare payments for 1986 (before the OBRA-86 provision was implemented) and 1988 (after implementation) for two groups of randomly selected disabled beneficiaries:. A study group of those who had LGHP coverage through a working spouse or other working family member throughout 1988 and. A comparison group of those who had a working family member but did not have LGHP coverage through that family member during We determined the mean Medicare payment for the two groups. Using figures from HCFA S automated data retrieval system (current through 1989), we obtained 1986 and 1988 expenditures under part A (primarily for inpatient hospital services) and part B (for outpatient hospital and physician services). We compared the physician services expenditures from this source to expenditure information from Medicare carrier records and adjusted them for any differences. After further adjusting the expenditure data to reflect outstanding claims, we combined the part A and part B costs for each beneficiary and estimated the mean cost for the two groups. n 1986, the mean Medicare cost per disabled beneficiary for those with and without LGHP coverage through a working family member was comparable (see table 1). However, the mean Medicare cost for those with LGHP coverage through a family member decreased by $1,430 from 1986 to For disabled beneficiaries without such coverage, it increased by $181 during this period. Because of the similarity between the two groups and the absence of other explanatory factors, we assumed that HCFA had instructed Medicare intermediaries and carriers to use these factors as a basis for determining employee status before issuing the proposed regulations. Page 4 GAO/HRD Medicare Shifta Some Disabled Cata to Employer8 E the difference in mean Medicare costs between the two groups in 1988 was due to the OBRA-86 provision. Table 1: Dlffrrencer n Medicare Mean Cortr Between Study and Compariron Qroupm (1986 and 1988) Group Study group-with Comparison roupwithout LG % P LGHP No. MG cost No. Mean cost Difference 286 $2, $883 - $1, , , Total Medicare savings resulting from the OBRA-86 provision s effect on disabled beneficiaries with LGHP coverage through a family member was about $322 millions in This estimate results from projecting the reduction in Medicare costs obtained from our comparative analysis to our estimate of all beneficiaries with LGHP coverage through a family member (214,000 or 8 percent of the disabled Medicare population). While the estimated 1988 savings from the OBRA-86 provision were significant, they could have been greater. Our analysis of the 1988 expenditure data also showed Medicare was the primary payer for claims from some disabled beneficiaries who had LGHP coverage through a working family member. Under these circumstances, Medicare should have been the secondary payer; thus, the payments presumably were made by mistake. Such mistaken Medicare payments for disabled beneficiaries with LGHP coverage through a working family member totaled, we estimate, about $148 million in Although we did not attempt to determine why the mistaken payments were made, we previously reported that a principal cause was the failure of Medicare contractors to identify the existence of primary insurance coverage.8 Legislation passed by the Congress in 1989 that enhances the ability of Medicare contractors to identify primary insurers is expected to reduce mistaken primary payments. 6We estimate, at the 96-percent confidence level, that the actual figure is at least $219 million. We adjusted our estimate for the prevalence of disabled adult dependents (primarily children of deceased, retired, or disabled workers who are at least age 18) in our comparison group and the observed difference in average Medicare costs between these individuals and other disabled beneficiaries (see app. ). We estimate, at the 95percent confidence level, that the actual amount lost was at least $86 million. See app. 1 for more information about our methodology. amedicare: More Hospital Costa Should Be Paid by Other nsurers (GAO/HRD87-43, Jan. 29,1987); Medicare: ncentives Needed to Assure Private nsurers Pay &fore Medicare (GAO/HRD89-19, Nov. 29,1968). Page 5 GAO/Hl?DBl-24 Medim Shfta Some Dhbled Costa to Employem B Savings Through Employee s Own LGHP Coverage The OBRAS provision also covers about 26,000 disabled beneficiaries who were in trial work programs or in extended eligibility after completing trial work, and were covered through their employer s LGHP. This number, an estimate from our May 1990 report, constitutes less than 1 percent of the disabled Medicare population, n addition, HCFA recently estimated that Medicare was secondary payer for 29,000 beneficiaries9 in 1989 because they met HCFA factors establishing or indicating employee status. That is, they met one of the three HCFA-proposed factors establishing employee status or one or more of the five indicators of employee status. Although HCFA intended that these indicators show that an individual is an employee within the ordinary understanding of that term, several employers we met with questioned whether the indicators were appropriate determinants of employee status. We advised HCFA officials that one proposed indicator-participating in an employer s benefit plan available only to employees-stretched our understanding of what constitutes an active employee. Comments on the March 1990 proposed regulations criticized the clarity and appropriateness of the five factors indicative of employee status as well as their effect on employers costs. As of December 1990, HCFA was considering these comments and had not issued final regulations, We did not perform a statistical analysis to estimate the OBRA-86 provision s savings attributable to beneficiaries with LGHP coverage through trial work or employee status. The trial worker group constituted less than 8 percent of those initially estimated to be affected by the 0~~~46 provision and, when we began data collection for our study groups, HCFA had not prescribed conditions and criteria for determining employee status. f Medicare savings per beneficiary in these groups were comparable to the savings for beneficiaries covered through a family member s health insurance, annual program costs would decrease as follows:. For those with trial worker involvement, by about $39 million beginning in 1989, and l For those not working but meeting HCFA S indicators of employee status, by $44 million in HCFA estimates, however, that the number of individuals defined as having employee status will decline by 25 percent annually as An official agency estimate of this group s size was not available at the time of our May 1990 report. At that time we reported that a HCFA analyst s best guess was that this group totaled 60, ,000 individuals. The report also noted that HCFA officials stated this figure was preliminary and might be too low. Page 8 GAO/HRD Medicare Shifts Some Disabled Coats to Employers ,., B employers adjust their personnel policies to avoid meeting HCFA'S indicators of employee status. As a result, savings from this group will decline to about $15 million in 1993 and $9 million in f in 1989 Medicare paid mistakenly as primary payer for these groups of disabled beneficiaries at the same rate as for beneficiaries with coverage through a family member, the program lost potential savings of another $18 million from trial workers and $20 million from those with employee status. Effect on Disabled &neficiaries Appears Limited The 0~~~436 provision has not caused changes to employers hiring or retention practices that would disadvantage family members of disabled Medicare beneficiaries, nor has it had more than minor effects on health plans. To assess such effects, we used mail questionnaires and interviews and examined selected employer plans. Questionnaires were sent to. 300 companies randomly selected from Fortune magazine s list of the 1,000 largest U.S. industrial and service companies (to enhance the likelihood of truthful responses, we gave them anonymity) and. insurance commissioners in the 50 states and the District of Columbia. n addition, we interviewed officials from large corporations, the health industry, HCFA, and groups that represent the disabled (such as the Paralyzed Veterans of America). Finally, for selected health plans from 51 employers, we compared the coverage provisions in effect before and after implementation of the 0~~~4-86 provision.lo Negligible Effect on Hiring Only 1 of 154 large companies we surveyed had attempted to avoid hiring employees with a disabled spouse or dependent. The company did not indicate whether this action was as a result of the 0~~~86 provision. (See app. for a more detailed presentation of the results and app. for a copy of the questionnaire.) Moreover, officials from nine organizations representing the disabled and three closely associated with the insurance industry told us they were unaware of any instances where the provision adversely affected disabled Medicare beneficiaries or their spouses. These employers were selected judgmentally based on information provided by a random sample of about 9,000 disabled Medicare beneficiaries (see app. ) that indicated the employers provided LGHP coverage. Page 7 GAO/HRD Medicare Shifta Some Disabled Costs to Employers B Effect on Health Appears Minor Plans While there have been some changes that could adversely affect health plan coverages provided to employees, including disabled beneficiaries and their families, the OBRA-86 provision appears to have played only a limited causal role in these changes. For example, 36 of the 154 companies responding to our questionnaire indicated that they had increased the employees share of premiums for health insurance for spouses and dependents. However, company responses cited the 0~~~446 provision as a cause in only 4 of the 36 changes. Further, these changes did not single out the disabled but affected all employees covered by the employers group health plan. Of 38 insurance commissioners who responded to our questionnaire (see app. V), 5 indicated they were aware of post-oma-86 changes to employer-based health plans that could negatively affect the disabled. However, the fact that some of these changes also occur among employers not directly affected by the OBRA-86 provision suggests that the changes were related to other factors. For example, in three cases the employer changed insurers and the disabled workers or spouses lost coverage because of a pre-existing condition clause. GAO has recently testified and reported that this practice occurs frequently among many small employers* As with employment effects, officials from organizations representing the disabled and associated with the insurance industry were unaware of any adverse effects of the OBRA-86 provision on coverage of disabled Medicare beneficiaries or their spouses. Although HCFA cited one case in which a disabled beneficiary was disenrolled from a LGHP, this occurred before HCFA issued its proposed regulations covering such actions. n addition, the beneficiary was re-enrolled in the plan after HCFA determined that the action violated 0~~~36's taking into account provision, This provision prohibits LGHPS from considering an individual s Medicare

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